New legislation limits employee stock option deduction benefit for employees of certain employers

Lawyers explain effects of new stock option tax rules on employees and employers

New legislation limits employee stock option deduction benefit for employees of certain employers

Under the new stock option tax rules, the 50 per cent available deduction, contingent upon certain conditions, is now subject to a $200,000 maximum allowable annual value, based on the security’s fair market value on the grant date.

Bill C-30, or An Act to implement certain provisions of the budget tabled in Parliament on April 19, 2021 and other measures, received royal assent on June 29 and took effect on July 1. The bill was first announced in the 2019 federal budget, while its draft was released last Nov. 30. Chrystia Freeland, deputy prime minister and federal finance minister, sponsored the bill.

Sarah Campbell, a partner practising business law in the Halifax office of McInnes Cooper, wrote a post offering an overview of the amendments to the Income Tax Act (Canada) relating to employee stock option tax and their effects on both employers and employees.

The new legislation does not impact employees of Canadian-controlled private corporations (CCPCs), employees of corporations with an annual gross revenue not over $500 million and employees who are party to stock option agreements entered prior to the law’s effectivity date, Campbell said. Those not falling under these exceptions are subject to the new restrictions.

Campbell noted that, if an employee is granted numerous security options within a year which exceed the $200,000 maximum, then the options first granted will qualify first for the stock option deduction, while the remaining options going over the maximum — which are called “non-qualified securities” — are taxed like a regular employee benefit, such that the difference between the share’s value as of the acquisition time, and the amounts paid to acquire the share and to acquire the option are included in the income. If it is a CCPC, such will generally be included in the income in the year of disposition, while if it is not, it will be included in the year of acquisition.

Campbell explained that employers can claim a tax deduction on the portion of employee option benefits going over the employee deduction limit as long as notification requirements are complied with, and can issue securities pre-designated as non-qualified securities. Such pre-designation will prevent the employee from being entitled to a stock option deduction and will allow the employer to deduct the value of the benefit the employee would have gotten.

Mark Firman, counsel and member of the Montreal office’s tax group and the national pensions and benefits group at Stikeman Elliott LLP, wrote a post explaining the requirements imposed on employers subject to the new rules.

Such employers should notify employees in writing regarding which shares are non-qualified securities within 30 days from the making of the option agreement and should notify the Minister of National Revenue via the Canada Revenue Agency of the same by the due date of filing for the employer’s taxation year during which the option agreement was made, Firman wrote, and noted that no form has been prescribed so far.

Employers subject to the new rules also need to track options during their life cycle, the shares underlying such options and whether these shares are considered non-qualified securities and need to ensure that their records are sufficiently detailed, Firman added.

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